The challenges of reallocating SDRs to vulnerable countries

The challenges of reallocating SDRs to vulnerable countries
The voluntary reallocation of part of the Special Drawing Rights (SDRs) from advanced to developing countries is potentially a major transformation of the international monetary system.

Attention has so far focused on the channels of this reallocation, due to the need to preserve the reserve asset nature of SDRs. It is equally important to discuss the final geographical distribution and use of these reallocated SDRs. An important issue is the determination of the beneficiaries and how they will be targeted. This is particularly the case for the Poverty Reduction and Growth Trust (PRGT) or the potential Resilience and Sustainability Trust (RST), both of which would be administered by the IMF and for which the amounts reallocated would be determined by the IMF quota formula. The IMF quota formula was not designed to target the poorest countries, and as FERDI's work shows, it gives little weight to the IMF’s questionable measure of vulnerability. Not all developing countries have the same vulnerabilities, needs, or absorptive capacity. The current IMF quota formula, while it does take vulnerability into account to a small extent, does not seem appropriate for reallocating SDRs to and among vulnerable countries.

FERDI's work argues that the vulnerability of countries, in all its main dimensions, should guide this reallocation. Simulations show that the shares of SDRs reallocated decrease with vulnerability if the IMF quota formula is used and increase if the FERDI vulnerability-based formula is used. Sub-Saharan Africa countries, Least Developed Countries (LDCs), and Small Island Developing States (SIDS) would be the main beneficiaries of using a vulnerability-based formula.

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